Market Overview
It was interesting to see that in the absence of US Treasury markets to drive sentiment yesterday there was a sense that perhaps the immediate dollar strength was being pared. Focus instead coming on the fiscal position of Italy and the easing of reserve requirement ratio by the PBOC. However, Treasuries have resumed trading today and yields are pushing higher once more, with the 10 year yield hitting 3.25%.
This yield strengthening has been worrying traders in recent sessions, leading to renewed appetite for a safe haven Japanese yen and US dollar, whilst also tending be selling pressure through equities. The dollar has also been making ground against the Chinese yuan which is now solidly above 6.90 and edging back towards the August peak of 6.96, and with pressure on emerging markets in classic signs of risk aversion. Although Wall Street rebounded into the close yesterday, it would be a far more significant achievement to do this in the face of rising bond yields.
Futures are ticking back lower again today and subsequently question the prospects of a renewed rebound. For now direction on forex majors is fairly limited, but if yields continue to stretch out on both Treasuries and Italian BTPs then risk aversion is likely to be renewed once more.
Wall Street rallied into the close but still ended the session fairly mixed with mild gains on the Dow and slight losses on S&P 500 (-1 tick at 2884. However futures are around -0.2% lower and Asian markets have been down overnight (Nikkei -1.3% although this after a public holiday yesterday, and China’s Shanghai Composite was -0.1%).
In forex markets there is a continuation of the risk aversion once more with the yen outperforming and the dollar also stronger, with the euro still showing just a touch of underperformance.
In commodities, there is a mild stability building with gold and silver a shade higher, but also oil is looking to form support after recent weakness.
There are no major economic releases today. Traders of UK assets may be keeping an eye on the comments of the Bank of England MPC’s Ben Broadbent at 15:35 BST. Deputy Governor of the Bank of England, Broadbent views very much on the balance of the committee and closely aligned to Governor Carney.
Chart of the Day – AUD/USD
The selling pressure of recent weeks has taken the Aussie lower from the eight month downtrend to form yet another lower low. However, there are a few signs of exhaustion that is turning into a near term technical rally as the momentum indicators suggest either limited downside potential and/or a technical rebound approaching. The downtrend throughout 2018 has been very orderly in formation, with lows consistently coming where the RSI turns higher in the low 30s and Stochastics begin to turn higher. With the market reacting higher yesterday, the RSI bottomed on Friday at 31 and the Stochastics are in the early stages of a bulls cross (not yet confirmed). This is still very early, but the hourly chart shows positive divergences on momentum indicators with both hourly RSI and hourly MACD lines tracking higher over the past few sessions as the price has fallen. Resistance of the old low at $0.7085 is a barrier that is being tested this morning, but the hourly chart shows a turnaround in near term sentiment would come above $0.7100. The main caveat is that broad market risk aversion would be Aussie negative, whilst recent technical positive divergences have previously resulted in consolidation patterns that unwind momentum rather than a recovery. Support is at $0.7040 initially and technical rallies would still be another chance to sell, but the immediate outlook is showing signs of this potential technical rally. Resistance is at $0.7140 and then $0.7200.
The dollar strengthening that has taken EUR/USD lower over the past two weeks has just had the pause button hit in the last few sessions. This comes as the market continues to consolidate around $1.1500 which still looks to be a gauge for the near to medium term sentiment. There is still a negative bias to momentum but the impetus behind the correction has dropped away. The support of recent sessions has been around $1.1460 and a close below this would generate downside once more, with a move then open back towards $1.1300. This remains the risk, with the hourly chart reflecting the bearish bias as resistance builds at $1.1550. However, the bears are not in decisive control quite yet.
Sterling was under pressure for much of yesterday’s session but a late rebound into the close enabled the bulls to hold up well and the recovery in place since last Thursday is still in play. The rally back above $1.3000 as a psychological level is important, whilst trading above $1.3050 which has been a consistent pivot area also adds to the improvement. The momentum indicators are broadly neutrally configured now and the market is trading above the moving averages thus bolstering the support of the growing seven week uptrend. The hourly chart is also now more positively configured, with weakness being bought into. Support is initially at $1.3025 and holding above $1.3000 (which is also a basis of a pivot) remains positive near term. Resistance at $1.3135 and $1.3215.
The correction has become more significant after a strong negative candle yesterday which has broken the support of the four week uptrend and moved the pair below the previous breakout support at 113.15. The momentum indicators are turning increasingly corrective now with the near term sell signal on the Stochastics and a bear cross on the MACD lines seen today. However, corrections will still be seen as a chance to buy and this is an unwinding move within the bull market. All moving averages are rising in bullish sequence and there is plenty of underlying demand in the 112.15/113.15 support band. Hourly momentum is still correctively configured, with resistance building at 113.40/113.50. There could easily be further slippage in this corrective move, but at some stage the bulls will be eying their next opportunity and so be on the lookout for bull signals. Support at 112.50 and 112.15 now.
Gold
There is a negative bias still within this trading range for gold. There is a mild run of lower highs linking back to the early August pivot at $1217, with the latest at $1208, whilst there is also an attraction towards testing the lows around $1180/$1184. Momentum indicators back this outlook, with Stochastics flipping lower once more. Yesterday’s bear candle is heaping the pressure on once more, but the bulls are looking to respond this morning. Reaction to what is now near term resistance at $1195 will be interesting, whilst the basis of the pivot around $1200 adds to resistance. A failure to recover in this morning’s rebound will add further pressure on $1180, whilst a breach opens $1160.
WTI Oil
With dollar strength and negative market sentiment hitting across asset classes, the oil price has slipped into profit-taking mode in recent sessions. However, is this move already exhausting? An intraday rebound from $73.05 has formed what could arguably be seen as a bull hammer candlestick. This adds weight to the view that this move is just a correction within the seven week trend higher. With the low coming above the good breakout support $7165/$72.80, this is also a positive. The momentum indicators are holding up well and this move has helped to unwind momentum within the medium term bullish outlook and should prove to be a chance to buy. The hourly chart shows resistance between $74.60/$75.20 which sees little intraday rallies rolling over now. A move back above $75.20 re-engages the bulls.
In the absence of bond markets in the US to drive sentiment, equities traders were flying solo yesterday however there was still a session posted that could be significant. An intraday rally off 26,223 bounced over 250 ticks into the close and formed a bull hammer candlestick one day reversal pattern. How the bulls respond today will be key as after two sessions of testing potential top pattern, a positive reaction today would suggest this is being rejected. The move also came from just above the trendline support of the uptrend channel (which comes in at 26,150 today) and is encouraging. Momentum indicators have been fluctuating in recent weeks and it will be interesting to see if the bulls come in today whether there is a stabilisation again, which would be a positive within the channel. The band of support 26,030/26,168 from the turn of August into September is key support, with a breach of 25,755 being a decisive change of outlook.
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